3 Reasons General Electric Company's Stock Could Fall

If you're thinking of buying GE's stock, think hard about these major concerns.

Aug 21, 2014 at 6:40PM

Hq Upstatenyer Large

GE's been around for over a century, but will it continue to thrive? Former GE headquarters building. Source: Wikipedia/UpstateNYer

General Electric (NYSE:GE) is a corporate jack of all trades. As a result, the ups and downs of specific industries -- like transportation or healthcare -- tend to balance each other out over time. This, in turn, leads GE's stock to closely track the overall economy.

But that story hasn't really played out in 2014. While the S&P 500 has climbed to new heights -- returning 7% to-date -- GE's stock has dropped 7%. And this uninspiring trend could very well continue.

GE is attempting to pull off the daunting feat of shrinking GE Capital, a division that accounted for 30% of its revenue in 2013. Beyond that, there are a few other roadblocks that could stall GE's stock in the years to come. Let's take a look at these one by one.

1. GE's too big to manage

One of the most common complaints about GE is that the sum of its parts are worth greater than the whole. Or at least they would be should GE decide to separate itself into different companies.

There is no way of proving this hypothesis, but there is certainly evidence that GE's management team fails to make the most of its assets from time to time. If that's the case with the recent $16.9 billion acquisition of purchase of Alstom's power business, this stock's in for a rude awakening.

Consider, for example, the perennially disjointed NBCUniversal segment and GE Capital's derivatives fiasco in recent years. These missteps show that GE has dropped the ball --sometimes with disastrous consequences -- due to its largesse. 

Refrigerator Ge Artistry Series

GE's kitchen appliances business is an example of a GE subsidiary that's overstayed its welcome. Source: General Electric

Of course, GE attests that Alstom is a different sort of transaction -- i.e., it's a highly relevant industry and GE has experience working in France -- but there are plenty of reasons to be skeptical. GE Appliances, for example, is a prime example of management squandering a promising asset.

Back in 2008, GE was itching to spin off the appliance operations, hoping to fetch a price in the low-to-mid $6 billion range. That potential sale fell through, so GE kept the business and committed $1 billion to reinvigorate it. Less than two years ago, management was trumpeting the turnaround of GE Appliances, particularly the operations in Louisville's legendary Appliance Park.

But selling refrigerators and ovens doesn't pay like it used to: profit margins are a mere 4.6%. And now GE is in the middle of negotiating with buyers to sell the whole operation for a measly $2 billion-$2.5 billion. That's not the outcome that shareholders were hoping for. Further, it's a prime example of how a company's unwieldy size can lead to lackluster overall returns.

2. A question mark hangs over GE's future leadership 

Given the information above -- that GE's multifaceted business can be difficult to manage -- it's undoubtedly important that shareholders feel comfortable with the leadership team, particularly the CEO. But for the time being there's a cloud of uncertainty around who that might be in the years to come.

According to the Wall Street Journal, Jeff Immelt, GE's CEO of 13 years, has led several board discussions about shortening the expected tenure for the chief executive. At some point, GE made the decision to have CEOs stick around for at least two decades, but it looks less likely this will be the case with Immelt.

Jeff Immelt

CEO Jeff Immelt has run GE for 13 years, but during his tenure GE's stock has been on a roller-coaster ride. Source: General Electric

Now, the fact that Immelt could step down in the near future does not mean that he will, and there's good reason to believe that the succession process will be thoroughly communicated to shareholders well in advance. But few outside the company (and perhaps within) can convincingly point to the candidate that would be next in-line. Again, the Wall Street Journal has surmised that seven different names could be in the mix, but there's no identifiable front-runner at this point.

Adding another wrinkle to this issue, GE decided to part ways with John Krenicki, the former CEO of GE Energy, in 2012. It was a surprising move for a couple of reasons. Krenicki was running a $50 billion enterprise that had grown from a blip on the radar merely a decade prior. GE Energy's success was largely due to Krenicki's impressive leadership, and he promised to double the size of the energy business to $100 billion before the sudden departure.

After 28 years within the company, Krenicki's career mirrored Immelt's in many ways. As a result, he was seen as the most promising candidate to replace him when the time came. But Krenicki's no longer in the mix and the energy business at the heart of GE has been split into three units. Only time will tell whether it can continue to thrive under new management.

Krenicki's departure left a gaping hole in GE's leadership team. He was effectively running a Fortune 50 company within GE, and he was positioned to be first in line should Immelt decide to step down. The lack of a clear succession plan could dampen investors' enthusiasm and weigh on GE's stock price.

3. This could be the worst time to buy a cyclical stock like GE

China Port Flickr Jed Sullivan

A port in China. In a hyper-connected global economy, an Asian slowdown reduces demand for coal, which means less rail transport and a falloff for GE's locomotive engine business. Source: Flickr/Jed Sullivan

GE is one of the oldest manufacturers in America, and it has therefore witnessed its fair share of economic cycles. That doesn't mean, however, that GE's somehow immune to the ups and downs of those cycles. They can still wreak havoc on its stock price, and now could be one of the worst times to plow money into a cyclical company like GE.

Let me preface this by stating that the Motley Fool is not an advocate of timing the market -- by any stretch of the imagination. However, the world of industrial companies presents a unique situation. Companies like GE are not consumer-facing in the way that Apple or Samsung are. GE sells most of its products to organizations in the private or public sectors -- like railroads, airlines, or the Department of Defense.

Why does this matter? Well, to borrow insight from Ken Fisher, CEO of Fisher Investments, industrial companies tend to "produce huge machinery or other complex products with big sticker prices. And for this reason, out of all the sectors, Industrials has historically been the most economically sensitive and the most correlated to the broader market." Big-ticket items require deep pockets, and consequently, organizations that sense economic uncertainty are the first to tighten their purse strings. 

This does not bode well for GE at a time when an economic slowdown could be just around the corner. First off, there's plenty of uncertainty right now, whether it's related to the dangers of war, Asia's slackening growth outlook, or the perils of an increasing divide between high and low incomes. If any of these issues were to escalate, it's likely that purchasing departments would curb their spending habits.

Secondly, the American economy -- GE's largest market -- is well into the fifth year of a bull market. The average bull market, for comparison, has lasted only 3.8 years during the era following the Great Depression. We are currently witnessing one of the longest stretches of economic growth since the beginning of World War II. And guess what: Stocks are incredibly pricey compared to historical averages. Currently the S&P 500 is priced 25% higher than the long-term average price-to-earnings ratio of 15.

By all means, I am not trying to call a market bottom right here, right now. I am noting that GE's exposure is global, it operates in an economically sensitive industry, and therefore this is not an ideal time to buy shares. What's more is that companies like GE will feel the brunt of a pullback more severely than those from almost any other sector. 

Even if you believe that GE's poised to prosper in the long run, a correction could wreak havoc on its stock in the near term. Given this scenario and the fact that the economy will hit a wall at some point (it always does), it might be best to hang out on the sidelines for now. 

The takeaway
 for investors

GE's picked up a lot of momentum in recent years by digging itself out of a hole created by GE Capital and pushing the throttle in the energy and aviation markets around the world. Still, much of GE's progress could come undone through a costly acquisition or a serious management misstep. Tack on a lukewarm economic environment in many regions of the world, and there's good reason to be skeptical about GE's ability to outperform.

Can GE's dividend match up with the best?
The smartest investors know that dividend stocks like GE tend to crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Isaac Pino, CPA owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers